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Highlights

The $700 billion rescue package for the U.S. financial
system approved by lawmakers in October calls on the SEC to study
fair value accounting’s impact on recent bank failures and the
quality of financial information available to investors. The study
will be conducted in consultation with the Treasury secretary and the
Board of Governors of the Federal Reserve System.

The rescue package, the Emergency Economic Stabilization Act of
2008, allows the Treasury Department to buy up problem assets in an
effort to improve the balance sheets of financial institutions and
keep credit flowing. The final version of the plan passed by Congress
and signed by President Bush on Oct. 3 also reaffirms the power of the
SEC to suspend the use of mark-to-market accounting under FASB
Statement no. 157, Fair Value Measurements, for any issuer or
any class or category of transactions.

Some financial institutions have said that mark-to-market rules hurt
their balance sheets and exacerbated the credit crunch by forcing them
to write down certain securities. Others including Federal Reserve
Chairman Ben Bernanke have said that suspending mark-to-market
accounting would deprive investors of needed information.

On Sept. 30, the day after House lawmakers rejected an earlier
version of the economic rescue plan, FASB and the SEC released
clarifying guidance on fair value accounting. On Oct. 3, FASB
separately released a proposed FASB Staff Position that clarifies the
application of Statement no. 157 in an inactive market and provides an
illustrative example to demonstrate how the fair value of a financial
asset is determined when the market for that financial asset is not
active. The proposed FSP is available at www.fasb.org/pdf/fsp_fas157-3.pdf.
Although the proposed FSP would amend FASB Statement no. 157 to
clarify its application in an inactive market, the principles
established by Statement no. 157 for measuring fair value remain unchanged.

The joint SEC/FASB guidance (available at www.sec.gov/news/press/2008/2008-234.htm
or www.fasb.org/news/2008-FairValue.pdf)
addressed five key points and reinforced the role of clear and
transparent disclosures in providing investors with an understanding
of the judgments made by management. Among the points was that
management’s internal assumptions, such as expected cash flows from an
asset, can be used to measure fair value when no relevant market
evidence exists.

“In some cases, multiple inputs from different sources may
collectively provide the best evidence of fair value,” the joint
guidance reads. “In these cases expected cash flows would be
considered alongside other relevant information.”

Among its many tax provisions, the Emergency Economic
Stabilization Act equalized with that of taxpayers the
understatement penalty standard tax preparers must observe for
undisclosed items. The provision was originally introduced
in the House late last year at the urging of the AICPA to fix the
problems created by the “more-likely-than-not” language added in 2007
into IRC § 6694. Prior to the 2007 changes, the undisclosed reporting
standard for preparers had been a “realistic possibility of success.”

Now the standard, consistent with section 6662(d)(2) for taxpayers,
generally requires that preparers have “substantial authority” for
positions taken (and is generally retroactive to the enactment of the
more-likely-than-not standard). Section 6694 does retain the increased
penalty amounts introduced last year, the higher of $1,000 or 50% of
the income derived or expected from the return or claim, and its
broadened applicability.

Other tax provisions of the act include:

Brokers required to file information returns for
securities sales under section 6045 must include adjusted basis
of the securities if acquired through a transaction in the
account in which the securities are held or from another account
for which the broker has received a statement pursuant to
section 6045A. The information must also include whether gain or
loss is short- or long-term. The provision takes effect for most
stocks acquired on or after Jan. 1, 2011, and in subsequent
years for other securities.

Financial institutions that held preferred stock of Fannie
Mae and Freddie Mac on Sept. 6, 2008, or sold or exchanged it
anytime between Jan. 1 and Sept. 7, 2008, are allowed to treat
losses arising from it as ordinary, rather than
capital.

“Extender” items include a one-year “patch” of the
alternative minimum tax threshold and a two-year extension of
the research and development credit and would raise to 14% from
12% the allowable credit for qualified research expenses under
the alternative simplified method.

FASB issued FASB Staff Position no. 133-1 and FIN 45-4,
Disclosures about Credit Derivatives and Certain Guarantees: An
Amendment of FASB Statement No. 133 and FASB Interpretation No.
45; and Clarification of the Effective Date of FASB Statement No.
161. The guidance is intended to improve disclosures about
credit derivatives. Over the past few years, credit default swaps have
become the most dominant product of the credit derivatives market,
FASB said in a release about the FSP. They also have drawn attention
from market participants and regulators because of the turmoil in
credit markets during 2007 and 2008. During this period, some sellers
of credit derivatives have seen a large number of obligations that are
referenced in credit default swaps facing actual or potential
defaults, resulting in large liabilities and/or potential credit downgrades.

The FSP addresses concerns of financial statement users that the
disclosure requirements in Statement no. 133 do not adequately address
the potential adverse effects of changes in credit risk on the
financial statements of the sellers of credit derivatives. The FSP
also amends FASB Interpretation no. 45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, to require an additional
disclosure about the current status of the payment/performance risk of
a guarantee. The amendment reflects the board’s belief that
instruments with similar risks should have similar disclosures. The
provisions of the FSP that amend Statement no. 133 and Interpretation
no. 45 are effective for reporting periods (annual or interim) ending
after Nov. 15, 2008.

The FSP also clarifies that the disclosures required by FASB
Statement no. 161, Disclosures about Derivative Instruments and
Hedging Activities, should be provided for any reporting period
(annual or quarterly interim) beginning after Nov. 15, 2008. For
example, an entity with a March 31 fiscal year-end should provide the
disclosures for its fourth quarter interim period ending March 31,
2009, in its 2009 annual financial statements. The clarification is
effective upon issuance of the FSP.

A draft on amendments to Statement no. 140 includes proposals
intended to improve the relevance, representational faithfulness and
comparability of the information that a reporting entity provides in
its financial statements about transfers of financial assets,
including through securitization transactions. A proposed statement to
amend FIN 46(R) outlines amendments to the guidance for determining
whether an enterprise must consolidate a special-purpose entity,
including those previously considered qualifying special-purpose
entities. The deadline for comments on the two proposed statements is
Nov. 14.

The third proposal, a FASB Staff Position, would amend Statement no.
140 to require public entities to provide additional disclosures about
transfers of financial assets and also amend FIN 46(R) to require
public enterprises to provide additional disclosures about their
involvement with variable interest entities. The effective date would
be the first reporting period (interim and annual) that ends after
issuance of the FSP. Comments on the proposal were due Oct. 15 and the
board expects to issue the FSP in the fourth quarter of 2008, which
means that it would be effective for financial statements issued as of
Dec. 31, 2008, for calendar year-end, public entities.

FASB’s goal with the FSP is to quickly improve disclosures by public
entities and enterprises until the pending amendments to Statement no.
140 and FIN 46(R) are effective. As proposed in the drafts, the FASB
statements would be effective at the beginning of each reporting
entity’s first fiscal year that begins after Nov. 15, 2009. The drafts
are available at www.fasb.org/draft/index.shtml.

FASB members favor shifting to international rules for
an auditor’s evaluation of an entity’s ability to function as a
going concern. The rules under U.S. GAAP would converge with the
International Accounting Standards Board’s International Accounting
Standard (IAS) 1, Presentation of Financial Statements, and IAS
10, Events after the Balance Sheet Date, supplemented by the
disclosure requirements in Statement on Auditing Standards no. 1,
Codification of Auditing Standards and Procedures, and AU
section 341, The Auditor’s Consideration of an Entity’s Ability to
Continue as a Going Concern.

The board also decided that the guidance should converge with IAS
literature with respect to the time horizon for the going concern
assessment. FASB will issue exposure drafts of the new guidance with a
60-day comment period. For information, visit www.fasb.org.

The Federal Accounting Standards Advisory Board
released an exposure draft, Reporting Comprehensive Long-Term
Fiscal Projections for the U.S. Government. One of FASAB’s
federal financial reporting objectives—the stewardship
objective—includes enabling readers to determine whether future
budgetary resources will likely be sufficient to sustain public
services and to meet obligations as they come due.

“The question of the long-term fiscal sustainability of U.S.
government services may be among the most important questions of our
time,” FASAB Chairman Tom Allen said in a news release. “The board
believes that fully meeting the stewardship objective requires
nontraditional approaches to complement and enrich the information
from the federal government’s balance sheets and operating
statements.”The proposed reporting would include information about
projected trends in the federal budget deficit or surplus and the
federal debt and how these amounts relate to the national economy.

FASAB said the objective of the proposed reporting is not only to
provide information that is useful and necessary in assessing fiscal
sustainability but also to effectively communicate that information in
a way that is meaningful and understandable to readers.

GASB proposed transferring accounting and financial reporting guidance contained in AICPA auditing literature into GASB’s accounting and financial reporting literature for state and local governments. The proposals are
intended to make it easier for preparers of state and local government
financial statements to identify and apply guidance on related-party
transactions, going-concern considerations, subsequent events, and
GAAP hierarchy for state and local governments.

The EDs—Codification of Accounting and Financial Reporting
Guidance Contained in the AICPA Statements on Auditing Standards
and The Hierarchy of Generally Accepted Accounting Principles
for State and Local Governments—would move the relevant parts of
the AICPA’s Statements on Auditing Standards (SASs) to the GASB
literature without substantive changes, although some editing has been
proposed to make the guidance specific to state and local governments.
The GASB proposal does not reconsider the guidance provided in the SASs.

The International Accounting Standards Board (IASB) and
FASB published an update to their 2006 memorandum of understanding
(MOU). The update reports the progress they have made since 2006
and sets the goal of completing their major joint projects by 2011.

“This update outlines a plan and projected timeline for completing
the remaining joint major projects included in the MOU,” said IASB
Chairman Sir David Tweedie, in a joint news release.

“We will continue our dual objectives of working toward global
convergence while addressing reporting issues of critical importance
to U.S. investors and financial markets,” said FASB Chairman Robert
Herz, in the same news release.

The CPA profession created an accounting doctoral
scholars program to help reverse a shortage of accounting faculty in
U.S. colleges and universities. The new program was spearheaded
by the largest accounting firms and will be administered by the AICPA
Foundation. More than 70 large CPA firms, along with several state CPA
societies, have committed a total of more than $15 million to the
program. The firms will help recruit top employees for the program and
encourage them to become accounting professors in the audit and tax
disciplines. The program will provide funding for up to 30 new
candidates each year for four years for a total of 120 additional
Ph.D.s in audit and tax. Applicants must have recent and proven
performance in audit or tax in a public accounting firm and be U.S.
citizens or permanent residents committed to a career as an accounting
faculty member at a U.S. university accredited in business by AACSB International.

The challenges of the new lease accounting standard have been pervasive to say the least. In this free, independently-written report, you'll learn effective adoption strategies as well as resources for easing the transition to the new standard.